No growth momentum before early 2021
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Auto sector’s contribution to GDP to reduce to about 7.2% in FY’20 from 7.5% in FY19.
Auto sector’s contribution to GDP to reduce to about 7.2% in FY’20 from 7.5% in FY19.

The sound of rain is a welcome relief that allays the anxieties of farmers. In the same way, the recent demand spike in retail during Dhanteras seems to have sown the seeds of hope in the Indian automobile industry.

Many have joined the celebrations, at least on public platforms; yet, there are quite a few who are either sceptical or confused about what lies ahead. So, it’s unclear whose side should one take while assessing all the possible aspects and perspectives.

Also, it remains to be seen how fertile these seeds of recovery are, especially when demand during the rest of the festive season, comprising Ganesh Chaturthi, Onam and Navratra, remained subdued.

The most important point to note is that this year, Dhanteras was on October 25, unlike last year when it fell on November 5. So, the growth shown is off a low base because in 2018, September onwards, the slowdown intensified due to the Kerala floods, impact of GST and hiked insurance costs of vehicles.

I have serious reservations about the tenacity of the euphoria as it is most likely ephemeral, and I shall argue the same later in the report.

However, all hope doesn’t seem to have been lost as the passenger vehicles segment looks positive. The largest carmaker Maruti Suzuki India Limited’s (MSIL) domestic sales in October 2019 went up 4.5%. While no other major carmaker posted growth (except for fringe players like Renault and Volkswagen), MSIL’s growth can also be attributed to the low base on account of heavy production cuts it had undertaken in the last few months.

What played spoilsport in the festive season was the confusion over BS-VI norms, the transition to EVs and expectations about GST cuts. All these factors kept people away from the showrooms in the hope of further slashing of prices, over and above the already existing steep discounts.

The passenger vehicle segment’s goal of reaching 5 million domestic sales by 2020 looks far away as it is set to shrink to around 3 million units in FY 2019-2020, down from 3.4 million units in FY 2018-2019.~

Despite the finance ministry clarifying that BS-IV vehicles will be allowed to run for their full life of 15 years, many buyers still have apprehensions that BS-IV cars might be banned once the BS-VI norms are implemented.

The Indian automobile industry saw its worst-ever half-yearly performance (April-September 2019) as sales dived 17.08 per cent to 11,736,976 units. The passenger vehicles segment saw an overall decline in sales of 23.56 per cent at 1,333,251 units in this period.

Two-wheeler sales also continued to fall, with monthly sales of 1,656,774 units in the first half of this fiscal, as compared to 2,126,445 units in September 2018, registering a dip of 22.09 per cent. Within the segment, motorcycle sales nose-dived 23.29 per cent, witnessing the worst fall in nearly two decades.

Among all the categories, the sales of commercial vehicles (58,419 units) witnessed the steepest dip of 39 per cent. Within the segment, Medium & Heavy Commercial Vehicles (M&HCVs) reported the first-ever decline of 62 per cent last month, with sales of 14,855 units, as compared to 39,210 units in the same month last year.

Given the situation, the passenger vehicle segment’s goal of reaching the 5-million domestic sales mark by 2020 looks distant at the moment, as it is set to shrink to around 3 million units in FY 2019-2020, down from about 3.4 million units in FY 2018-2019.

5 million PV sales target might not be achieved until FY 2024-25.~

The target might not be achieved until FY 2024-25 and unless the industry grows with a compounded annual growth rate of 10.5 per cent, which is obviously on the optimistic side if one considers the challenges due to the new BS-VI norms and other disruptions. This also means that we will fall short of achieving the next Automotive Mission Plan 2016-26 by a substantial margin.

The implementation of BS-VI norms will cause a cost jump of about Rs 15,000-25,000 of petrol models and Rs 50,000-70,000 of diesel cars, which is expected to further impact demand. The transition to BS-VI will also lead to a production cut of up to 20% in December, January and February of 2020 to manage inventory.

Eight of Maruti Suzuki’s models are BS-VI-compliant, while Honda Motorcycles & Scooters India has launched the BS-VI-compliant Activa 125 for the top 50 cities. But both the manufacturers have revealed that the impact on demand has been much less than was expected.

The situation is so grim that discounts and freebies have continued for over a year now, with little or no help in spurring any major demand. However, the upcoming policy on scrappage should act as a booster. During December-February, we might also see marginal growth in retail due to BS-VI pre-buying and end-of-the-year discounts.

The decline in infrastructure-related work has cast its shadow on the construction equipment (CE) sector, which is in for a hard landing in FY 2019-20. According to industry experts, the financial problems that have cropped up because of the credit crunch in non-banking financial companies (NBFC), coupled with the slowdown in the national road construction programme and delay in awarding new infrastructure projects by the government, have dented the sales volume of construction equipment by over 25 per cent in the first half of FY’20.

A CARE Ratings report states that during FY’19, 5,493 km of National Highways was awarded, which was 67.8 per cent lower than the 17,055 km awarded during FY’18. Furthermore, the projects award target has been reduced to 6,000 km for FY’20 from 20,000 km for FY’19.

The Association of Indian Forging Industry (AIFI) warned that 20 per cent of the 400 forging units will permanently close operations by the end of 2020 if the current situation prevails. This means on an average, five units will close every month from this month onward.

Over 85 per cent of the Rs 400-billion Indian forging industry comprises small-scale companies. Though the volume of medium and large-scale companies is only 15 per cent, the quantum of parts supplied by them is much higher than their smaller counterparts.

The auto component industry is running at as low as 50% capacity utilisation, forcing it to hold investment worth about $2 billion for capacity expansion.
The auto component industry is running at as low as 50% capacity utilisation, forcing it to hold investment worth about $2 billion for capacity expansion.

Overall, the auto component industry is running at as low as 50% capacity utilisation, forcing it to hold investment worth about $2 billion for capacity expansion. A good number of small and medium enterprises in this space have either closed down or are on the verge of winding up their business.

Further, according to data from the Centre for Monitoring Indian Economy (CMIE), India’s unemployment rate rose to 8.5 per cent in October, the highest since August 2016, and up from 7.2 per cent in September this year.

These numbers portray a rather bleak view of the future, and normalisation of the industry’s growth may take at least 18- 24 months, depending on the performance of the different segments.

The bigger worry is that the prevailing slowdown is not restricted to the USD 100-billion automotive industry as the entire economy has been in the doldrums for the last few years.

This economic meltdown is reflected in the Goods and Services Tax (GST) collections in September, which shrank to a 19-month low of Rs 91,916 crore from Rs 98,202 crore that was collected in August and Rs 94,442 crore in the same month a year back.

According to data released by the finance ministry, this was the second straight month of decline in the GST collections. There has been a small uptick in collections in October 2019 over the previous month, but on a year-on-year basis, revenue declined 5.29% in the same month. Moreover, GST faced major glitches and complexities, which created problems for businesses, especially small ones.

However, the biggest shocker was the Central Statistics Office’s (CSO) latest numbers, which revealed that growth rate in the first quarter ended 30th June had dropped to a six-year low of 5%, marking the slowest growth since the fourth quarter of FY’13.
No growth momentum before early 2021
The bleak market scenario has led to agencies, such as the IMF, World Bank and S&P, lowering their FY20 India GDP projections by 6.3%, 6.1 % and 6%, respectively. Looking at the situation, these projections look quite accurate.

This will also reduce the auto sector’s contribution to GDP to about 7.2% in FY’20 from about 7.5% in the last fiscal year.

India’s core sector output also touched a 14-year low, with a contraction of 5.2% in September 2019. As the automotive sector is at the centre of all economic activities and reacts to the performance of the overall economy, recovery is not in view anytime soon.

What Went Wrong

Over 50 top industry leaders, whom I interviewed to understand the situation, blamed the hurried policy decisions and flip-flops on EVs for this slowdown.

Most of these top executives still held demonetisation among the core reasons for the economic deceleration. The other two important factors are the new axle norms and GST, especially the latter, which has seen over 350 amendments that have badly hurt the small-scale businesses. The government seems to be in hyper-active mode when it comes to the implementation of new regulations.

Between 2002 and 2015, in the passenger vehicles segment, only three new norms were implemented, while between 2015 and 2020, 20 new norms/features have been made mandatory, 16 of which have already been implemented, including those related to BS-III to BS-IV emission standards. Interestingly, India will be the only country to leapfrog from BS-IV to BS-VI.

Surprisingly even though the situation has been worsening for more than a year and a half, none of the key stakeholders either made noise about it or took substantial action till recently.~

The trend is almost identical in other categories like two-wheelers, commercial vehicles and three-wheelers. This has further increased the cost of vehicles, which has kept buyers away from showrooms.

The biggest surprise is that even though the situation has been worsening for more than a year and a half, none of the key stakeholders noticed it or took substantial action.

The government could have leveraged the gains from lower crude prices to tame inflation and manage fiscal deficit targets. Instead, excise duty and cess have been increased manifold since 2014. At least now the government should either bring petroleum products under GST or cut excise to provide relief to the market.

It must be noted that key indicators like job creation and consumer demand, even for fast-moving consumer goods (FMCG), has been on a decline since the third quarter of the last fiscal. The spending power has been hit so hard that consumers have shifted to cheaper daily essentials in both urban and rural markets.

According to a media report published in January 2019, the National Sample Survey Office (NSSO) found that between July 2017-June 2018, unemployment stood at 6.1 per cent, the highest since 1972-73. In the same month, Reuters reported that the CMIE also revealed that the country had lost as many as 11 million jobs in 2018.

The Indian Auto Industry Status Report 2020 comes with more than 1,000 latest data points, insights from over 100 industry leaders and experts.
The Indian Auto Industry Status Report 2020 comes with more than 1,000 latest data points, insights from over 100 industry leaders and experts.

The automakers themselves started witnessing a slowdown after September 2018. Yet, many ignored the downward trend and kept on building inventory to show growth in their wholesales numbers. However, this backfired as even the 2018 festive season could not improve sales, leading to a massive inventory pile-up of two-wheelers and passenger vehicles across dealerships. In order to balance the inventory, manufacturers had to resort to continuous production cuts in the last few months. MSIL announced a 25 per cent cut in production in July 2019.

Policy changes, such as increased upfront insurance premiums and new axle norms, were the obvious dampeners in the short to mid-term. High fuel prices and the liquidity crunch, post the IL&FS crisis, also added to the woes. The next challenge could be the recent draft notification by the Ministry of Road Transport and Highways (MoRTH), which proposes a manifold jump in the registration costs of vehicles.

According to the notification, the registration cost of new cars has been proposed to be increased to Rs 5000 from the current cost of Rs 600, while that of new medium goods/passenger vehicles to Rs 20,000 from Rs 1,000 and of a new truck or a bus to 20,000 from Rs 1,500. The registration fee for two-wheelers is proposed to be increased to Rs 1,000 from the existing cost of Rs 50.

Although these proposals have been put on hold, once/if they are implemented after June 2020, the industry’s situation will worsen.

The only positive factor was the high GDP growth seen until the third quarter of the last fiscal, which wasn’t in sync with the real market conditions in many ways. According to the government, the GDP in Q1, Q2 and Q3 of FY 18-19 grew by 8.2 per cent, 7.1 per cent and 6.6 per cent before falling to 5.8 per cent in Q4.

It, thus, seems that despite the indications of weakening demand, the GDP numbers insulated the industry from the ground reality. Still, the question is why did this sense of urgency arise only after the industry went into a downward spiral and the situation is very unlikely to improve anytime soon?

In July, Finance Minister Nirmala Sitharaman announced that tax on electric vehicles and chargers would be cut to 5 per cent, from 12 and 18 per cent, respectively. However, the EV volumes are too low for this measure to have any major impact.

The government also reduced corporate tax to 25.1 per cent, along with providing a complete exemption from minimum alternate tax (MAT). The reduced corporate tax rate will be applicable only if no exemptions or incentives are availed, such as SEZ deduction, part C of chapter VI-A deductions like 80IA, etc. (other than section 80JJAA), R&D claims and investment-linked deductions u/s 35AD etc.

Earlier, this tax ranged between 29.12 and 34.94 per cent. The minister also announced a tax holiday for manufacturing companies in India from October 1, 2019. During this period, the applicable corporate tax would be 17.16 per cent as compared to the earlier 21.55 per cent. These steps have certainly put India at par with other emerging economies in terms of corporate tax and should encourage investments.

Now, the question is did these measures help in demand creation, which is the immediate need?

Apparently, the steps taken by the government had little or no positive impact in terms of demand creation. The banks and financiers remain cautious of and averse to lending. Our interaction with automobile dealers across segments revealed that 18-20% of sales (under the finance category) were cancelled as buyers couldn’t arrange financing. This is an important aspect because according to industry insiders, about 60 per cent of commercial vehicle sales, 70 per cent of two-wheeler sales and 30 per cent of car sales are financed by NBFCs.

Moreover, the government’s measures provided money to corporations and we saw very few automakers passing on the benefit to customers; due to this, there was no major demand boost. However, this may open up opportunities for electric vehicles and its allied industries for local manufacturing. Overall the industry remains cautious with weak sentiments.

Given the ground reality, the government’s resolve to make India a USD 5-trillion economy by 2025 seems unrealistic at present. To accomplish this rather uphill task, India needs to grow at a CAGR of 14%, and the manufacturing sector should add at least USD 1 trillion in the next five years. Finally, if the government seriously intends to pursue this goal, then it should avoid downplaying the industry’s problems and address the demand crisis immediately.

(This is an excerpt from the Indian Auto Industry Status Report 2020. For more insights, information and views on the auto industry, EV ecosystem etc, you can order the report soon.)

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